Internal Control

1. Define “internal control.”

2. Explain a company’s need for internal control policies and procedures.

3. Describe the effect that a company’s internal control has on the work of the independent auditor.

Question:The role of the independent auditor is described as adding credibility to

financial statements. The reported figures, though, are still the responsibility of management. How do a company

and its officials make certain that the information displayed in a set of financial statements is fairly presented?

Companies like Barnes & Noble and RadioShack participate in millions of transactions in geographically distant

store locations as well as internationally through their Web sites. Working with that amount of data, gathered from

around the world, can be a daunting technological challenge. Some organizations are able to accumulate massive

quantities of information with few—if any—problems; others seem to be overwhelmed by the task. The reliability

of the numbers gathered for reporting purposes impacts the amount and type of testing that the independent

auditor considers necessary. How do companies make certain that their own information is free of material

misstatements?

Answer: The human body is made up of numerous systems that perform specific tasks, such as the breathing

of air, the circulation of blood, and the digestion of food. Organizations operate in much the same manner.

Systems are designed and set in place by management to carry out essential functions, such as paying employees,

collecting cash from customers, managing inventory levels, and monitoring receivable balances. Within each

system, individuals are charged with performing specific tasks, often in a preordained sequence. For example, a

cash payment received in the mail from a customer should be handled in a set way every time that it occurs to

ensure that it is properly recorded and protected from theft.